Y7

Problem 1 Miss Jones has all her wealth m invested in her house, and she considers the coverage, q, of her fire insurance for the house. There are two states of the world: fire, f, with a probability p and no fire, n, with a probability (1-p). There is a fair premium of a per $ coverage, i.e., * = p. If she has no insurance and there is a fire her wealth will be my = 0. If she has no insurance and there is no fire her wealth will be m. = m. If she has some insurance, the wealth in the two states of the world will be m,, = m - nq and my = q - 7q. Miss Jones cannot take more than full coverage q = m. a) Assume that Miss Jones is an expected utility maximizer and specify her maximization problem. b) Assume that Miss Jones is an expected utility maximizer with the utility function u = m'S. Solve her maximization problem. How much coverage will she choose? Show your calculations